The key to making profits in the markets has been to buy large-cap growth stocks, and sell value stocks. At least, that’s what it seems like, when you take into account that the surge of the S&P 500 index year-to-date is largely attributable to big gains among big tech stocks. Although not for certain, this trend could continue in the near-term. Ongoing economic issues like high inflation, high interest rates, and slowing economic growth are keeping value stocks at depressed prices.
Meanwhile, secular growth trends like artificial intelligence (or AI) are helping to counter these macro headwinds when it comes to tech sector heavy-hitters. That said, while there is merit in going contrarian in some of these declining value stocks today, for their strong rebound potential tomorrow, keep in mind that this is not universal. There are scores of “value traps,” that may be at risk of experiencing further declines. This is due mostly to weak fundamentals, that more-than-counter their respective low valuations.
That said, as the market remains in a “sell value stocks” state of mind, consider now the time to exit all positions in these seven low-quality value plays.
Advance Auto Parts (AAP)
When it comes to avoiding stock losses, it may seem to0 late to raise a red flag with Advance Auto Parts (NYSE:AAP). As you may know, shares in the auto parts retailer took a serious dive on May 31, falling by 35% that day alone. Investors bailed on AAP stock, on the heels of the company’s quarterly earnings report. With results falling far short of estimates, and with management not only cutting outlook, but slashing the dividend by 83%, it’s no surprise shares experienced such an epic price decline. However, even after this massive price drop, consider it wise to sit on the sidelines.
The issues behind Advance Auto Parts’ recent reversal of fortune (inflationary pressures, a post-pandemic cool down in demand for aftermarket auto parts) may persist longer-than-expected. If AAP’s fiscal results remain lackluster in the coming quarters, forget about a rebound. Further declines for AAP are more likely.
Ally Financial (ALLY)
After falling on auto and banking-related worries earlier this year, Ally Financial (NYSE:ALLY) shares have been trending higher lately. The market is now optimistic that the auto loan-focused bank will ride out these issues. Given its valuation of only 7.1 times trailing twelve month (or TTM) earnings, ALLY stock investors also believe that a shift in sentiment could lead to an outsized rally for this seemingly-oversold stock. Yet while going contrarian may seem on the surface to be a worthwhile wager from a risk/return standpoint, in actuality that may not be the case.
As seen in Ally’s most recently-released financial results, it’s clear that the deflating of the “used car bubble,” and the potential for a “auto loan crisis” are far from being in the rearview mirror. These factors could continue to weigh on results. In turn, causing ALLY to give back some of its recent gains.
DISH Network (DISH)
On a stock screener, DISH Network (NASDAQ:DISH) looks like a bona fide bargain. The pay-TV service provider trades for a very low 1.9 times TTM earnings. However, there is more than meets the eye here. On a forward price-to-earnings (or P/E) basis, DISH stock trades at a much higher multiple (5.9). That still sounds super-low, but there’s a good reason why the market is assigning such a discounted valuation to DISH. As a Seeking Alpha commentator argued back in May, there is a high level of risk and uncertainty with the company.
Streaming has decimated DISH’s legacy satellite TV business, and its Sling TV streaming business has floundered as well. A turnaround hinges on its pivot towards becoming primarily a provider of 5G wireless services. As there is a strong chance this fails to happen, DISH belongs in the “sell value stocks” category.
Like DISH, Moderna (NASDAQ:MRNA) looks cheap on a TTM basis, but is pricier on a forward basis. The biotech company, known for its Covid-19 mRNA vaccines, trades for just 10.8 times earnings from the preceding four quarters. However, expected earnings declines with MRNA stock are far more severe. With the mass vaccinations of the pandemic era now a distant memory, Moderna’s sales have fallen to a point where the company is expected to report negative earnings per share (or EPS) during 2023, 2024, and 2025.
Yes, with nearly $9 billion in cash on hand, Moderna has the means to absorb these losses, which are related to its efforts to develop new mRNA-based therapeutics and vaccines. Still, given that not even management seems confident in a “second act,” it’s better to consider Moderna one of the overvalued stocks to sell, rather than one of the undervalued stocks to buy.
Early last year, the trend was your friend with Nutrien (NYSE:NTR). Russia’s invasion of Ukraine, and the post-invasion economic sanctions against Russia, exacerbated an already-tight fertilizer market, causing a big jump in prices. This in turn led to a big run-up in price for NTR stock, as investors bought in on the prospect of record earnings from this fertilizer products producer. Flash forward to now, though, and trends are clearly no longer strongly on Nutrien’s side. Fertilizer prices have tumbled, and the company’s earnings in 2023 and 2024 are set to fall, after a banner year in 2022.
These earnings declines may seem more than priced-in NTR, given its forward valuation of just 8.9 times earnings. Yet with sell-side analysts like Berenberg Bank’s Aron Ceccarelli downgrading the stock due to the expectation of further fertilizer price declines, this is another candidate for your “sell value stocks” pile.
Signet Jewelers (SIG)
Signet Jewelers (NYSE:SIG) isn’t a household name, but I’m sure you are familiar with the jewelry retailer’s numerous customer-facing brands, which include Blue Nile, Kay, Jared, and Zales. Trading for only 6.4 times earnings, SIG stock may seem like a high-grade gem on the surface. Yet if you look at it through a loupe, it’s debatable whether this low-priced jewelry stock is really a diamond in the rough. Earlier this month, Signet released its latest quarterly results and updates to guidance. While last quarter’s numbers came in ahead of estimates, Signet’s guidance update fell far short of expectations.
Persistent economic challenges may mean further disappointment in the quarters ahead with the company’s operating results. If economic conditions worsen, causing a further slackening of demand for consumer discretionary products like jewelry, management and analysts may have to walk back forecasts again. This could lead to more declines for SIG.
When critics of the value investing philosophy tell you to sell value stocks, they are really talking about selling value stocks like AT&T (NYSE:T). However, “Ma Bell” doesn’t represent all value stocks.
Rather, T stock is a prime example of one of the key value investing pitfalls: mistaking a low valuation and a high dividend yield as signs of deep value. As a mature, capital-intensive telecom company, it makes sense for AT&T to trade at a low 6.6 times forward earnings. This holds especially true, when you consider that AT&T’s high debt, not to mention the wireless industry slowdown, limits the potential for earnings growth. As for the stock’s high dividend yield? Buying T for its nearly 7% dividend may at first seem like a profitable move. However, if it’s outweighed by years and years of steady declines, this high yield is clearly not worthwhile.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.